AUDIT FINAL CH 10
2 types of fraud
1. fraudulent financial reporting 2. misappropriation of assets
Which of the following statements concerning noncompliance with laws and regulations by clients is correct? A.An auditor has responsibility to detect noncompliance with laws and regulations that has a direct effect on the financial statements. B.An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance with laws and regulations having any effect on the financial statements. C.An auditor has no responsibility to detect noncompliance with laws and regulations that has an effect on the financial statements. D.Whether an act constitutes noncompliance with laws and regulations is a matter of auditor judgment.
A.An auditor has responsibility to detect noncompliance with laws and regulations that has a direct effect on the financial statements.
Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be A.Considered in the evaluation of audit findings in the current year. B.Removed from the prior-year summary because they were immaterial. C.Retested during the current-year tests of controls. D.Disclosed by the client in the current-year financial statements.
A.Considered in the evaluation of audit findings in the current year.
During the consideration of fraud in a financial statement audit, the auditor should identify and assess risks that may result in material misstatements due to fraud. This assessment A.Is based on evaluating whether the entity's related controls have been suitably designed and implemented. B.Must state an overall judgment about whether an identified risk is high, medium, or low. C.Follows the auditor's determination that the related controls are operating effectively. D.Requires an observation that the three fraud conditions are present.
A.Is based on evaluating whether the entity's related controls have been suitably designed and implemented.
As the acceptable level of detection risk decreases, an auditor may change the A.Nature of substantive procedures from a less effective to a more effective procedure. B.Timing of substantive tests by performing them at an interim date rather than at year-end. C.Timing of tests of controls by performing them at several dates rather than at one time. D.Assessed level of inherent risk to a higher amount.
A.Nature of substantive procedures from a less effective to a more effective procedure.
Which of the following statements about materiality is most likely to be true? A.Performance materiality is less than materiality for the financial statements as a whole. B.Materiality requires that relatively more time be directed to those areas that are more susceptible to fraud. C.Materiality is measured according to specific AICPA standards. D.Materiality at the assertion level is larger than for the financial statements as a whole.
A.Performance materiality is less than materiality for the financial statements as a whole.
In a financial statement audit, A.The auditor should inquire of management about violations of laws and regulations as well as inspect correspondence with regulatory authorities. B.Regular audit procedures can reasonably be expected to detect all acts of noncompliance with laws and regulations. C.The auditor should contact enforcement agencies when an act of noncompliance with laws and regulations is discovered. D.Violations of laws having indirect effects on the financial statements are not of interest to the auditor.
A.The auditor should inquire of management about violations of laws and regulations as well as inspect correspondence with regulatory authorities.
A client decides not to correct misstatements communicated by the auditor that collectively are not material and wants the auditor to issue the report based on the uncorrected numbers. Which of the following statements is correct regarding the financial statement presentation? A.The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements. B.The financial statements contain uncorrected misstatements that should result in a qualified opinion. C.The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements. D.The financial statements are not in accordance with the applicable financial reporting framework.
A.The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
Audit risk at the assertion level consists of inherent risk, control risk, and detection risk. Which of the following statements is true? A.The risk that material misstatement will not be timely prevented or detected by internal control can be reduced to zero by effective controls. B.Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft. C.The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor. D.Detection risk is a function of the efficiency of an auditing procedure.
B.Cash has a greater inherent risk than an inventory of coal because it is more susceptible to theft.
Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality for the financial statements as a whole? A.The contents of the representation letter. B.The entity's year-to-date financial results and position. C.The results of the internal control questionnaire. D.The anticipated sample size of the planned substantive procedures.
B.The entity's year-to-date financial results and position.
Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets? A.An inability to generate cash flow from operations. B.A strained relationship between management and the predecessor auditor. C.A lack of independent checks. D.A high turnover of senior management.
C.A lack of independent checks.
During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do? A.Consider the fraud a scope limitation and disclaim an opinion. B.Immediately withdraw from the engagement. C.Communicate the matter to those charged with governance. D.Report the matters to regulatory authorities.
C.Communicate the matter to those charged with governance.
Certain individuals may have an attitude, character, or set of values that permit them to rationalize fraud. Moreover, individuals may have an incentive or be under pressure to commit fraud, or circumstances may provide an opportunity. The auditor's concern about the risk of material misstatements due to fraud is least likely to be increased if management A.Commits to unduly aggressive forecasts. B.Has an excessive interest in increasing the entity's stock price through use of unduly aggressive accounting practices. C.Consists of many individuals that make operating and financing decisions. D.Is interested in inappropriate means of minimizing reported earnings for tax-motivated reasons.
C.Consists of many individuals that make operating and financing decisions.
If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during an audit of an issuer, then the auditor should A.Not change the materiality level once it has been established. B.Raise the materiality level, but not lower it. C.Raise or lower the materiality level as appropriate to the situation. D.Lower the materiality level, but not raise it.
C.Raise or lower the materiality level as appropriate to the situation.
Moor, CPA, discovers a likely fraud during an audit but concludes that its effects, if any, could not be so material as to affect the opinion. Moor most likely should A.Perform additional audit procedures to establish that fraud has occurred. B.Confer with the client about the additional audit procedures necessary to establish that fraud has occurred. C.Report the finding to the appropriate representatives of the client with the recommendation that it be pursued to a conclusion. D.Notify the proper external authorities.
C.Report the finding to the appropriate representatives of the client with the recommendation that it be pursued to a conclusion.
When expressing an unmodified opinion, the auditor who evaluates the audit findings should determine whether A.Estimates of total misstatement include the amounts of adjusting entries already recorded by the client. B.The amount of identified misstatement is documented in the management representation letter. C.Uncorrected misstatements are material. D.The amount of identified misstatement is acknowledged and recorded by the client.
C.Uncorrected misstatements are material.
In an audit of a nonissuer's financial statements, projected misstatement is A.The likely amount of misstatement in the subsequent period's financial statements if a control is not properly implemented. B.The only amount that the auditor considers in evaluating materiality and fairness of the financial statements. C.An auditor's best estimate, before performing audit procedures, of misstatements that the auditor expects to find during the audit. D.An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.
D.An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.
Disclosure of possible fraud to parties other than the client's senior management and those charged with governance ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose possible fraud exist? I. To the SEC when the client reports an auditor change II. To a successor auditor when the successor makes appropriate inquiries III. To a government funding agency from which the client receives financial assistance A.II and III. B.I and III. C.I and II. D.I, II, and III.
D.I, II, and III.
The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level. The first risk (consisting of inherent risk and control risk) is that balances, classes of transactions, or disclosures contain material misstatements. The second is that A.The auditor will apply an inappropriate measure of audit materiality. B.The auditor will reject a correct account balance as incorrect. C.The auditor will apply an inappropriate audit procedure. D.Material misstatements that occur will not be detected by the audit.
D.Material misstatements that occur will not be detected by the audit.
Fraud Triangle
opportunity, pressure, rationalization
What is fraud
wrongful or criminal deception intended to result in financial or personal gain
